Financial Opinion and Insights

The Federal Debt Solution

Jim Lorenzen, CFP®, AIF®

Jim Lorenzen, CFP®, AIF®

If history is any guide, we may already know the answer.

Politicians will take the easy way out.

Given the increasing deficits, the outlook for growth is problematic.  It would appear there are three available options.  Which one do you think the politicians will choose?

(1) Reduce the level of debt, i.e., reduce spending; or

(2) A combination of higher taxes and reduced spending; or

(3) inflation. 

Since politicians can’t seem to get agreement on either of the first two, don’t be surprised if inflation will be the “solution” – the one that will bear no one’s finger prints and allow everyone to blame the other in their next re-election campaign… it’s always good to have another issue in your back pocket, you know.

Inflation is a common solution.  One study has found that in the past 400 years, inflation has been the most common way that governments have dealt with excessively high levels of debt.[1]  The reasons stated above help explain why.

Those of you who’ve been following my pontifications over recent years may remember my going on about this issue before.    

The short version:  Look for the U.S. to simply print money and inflate the currency to repay the debt – and taxpayers will be left paying for their spending to buy re-election.   

While the Main Stage debate will be over tax brackets and deductions, who pays, etc.,  the real action will be off to  the side out of sight:   Hidden taxes through higher prices, taxes buried inside the higher prices, fees we don’t know we’re being charged.  

My guess:  Expect average growth and above average inflation as countries around the globe attempt to deleverage by engaging in competitive devaluation to rebuild their economies.   The U.S. may be attempting to win that race.  This could be a five-year window – maybe more; I doubt it will be less.



[1] Carmen Reinhardt and Ken Rogoff paper, “Debt Overhangs: Past and Present”IFG Blog

Jim Lorenzen is a Certified Financial Planner® and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-only registered investment advisor with clients located in New York, Florida, and California.   IFG provides investment and fiduciary consulting to retirement plan sponsors, and retirement and wealth management services for individual investors. IFG does not sell products, earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues.  Content contained herein represents the author’s opinion and should not be regarded as investment advice which is provided only to IFG clients upon completion of a written plan.  The Independent Financial You can reach Jim at 805.265.5416 or through the IFG website, www.indfin.com, the IFG Investment Blog and by subscribing to IFG Insights letters for corporate plan sponsors and individual investors.  Keep up to date with IFG on Twitter: @JimLorenzen


Written by Jim Lorenzen, CFP®, AIF®

October 16, 2012 at 8:05 am

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